The start of 2018 means Saudi Aramco's record-breaking IPO is drawing closer. It should come as no surprise that January began with the major players jostling for position
Saudi Arabia announced earlier this month that Aramco has been granted new status allowing individuals to hold shares in the oil giant, which it aims to float on the stock market this year. A bulletin published in the kingdom’s official gazette said the cabinet had approved giving joint-stock status to Aramco effective January 1.
The move comes as the kingdom prepares to sell under five percent of state-owned Aramco, in what is expected to be the world’s largest-ever initial public offering (Saudi values its prize asset at $2tr). The flotation forms the cornerstone of a reform drive led by Crown Prince Mohammed bin Salman to wean the economy off its reliance on oil. As part of those plans, the government will create the world’s largest sovereign wealth fund and sell hundreds of other state assets.
Managed by a board of directors, rather than directly by government, joint-stock companies allow individuals to hold stock and thus share in both the debt and profit of the company. A provisional board of directors – Aramco’s first ever – will be appointed based on the recommendation of the kingdom’s oil minister, the bulletin said.
The Aramco IPO could generate $100bn in much-needed revenue after the country lost hundreds of billions of dollars since crude prices slumped in mid-2014, leading to huge budget deficits. And that means the whole world is interested in what it has to offer.
With so much at stake, Saudi Arabia’s stock market is pulling out all the stops. The Tadawul exchange is prepared for Aramco’s share sale regardless of the structure that the company decides to use for the listing, according to CEO Khalid Al Hussan. “Tadawul will be the home exchange for Aramco, and, if there is another exchange, the decision will be coming from the issuer in due course,” he says. The bourse is “taking all measures to ensure Aramco comes successfully to the market.”
The IPO of the world’s largest oil exporter has drawn interest from stock exchanges across the globe and even spurred US president Donald Trump and UK prime minister Theresa May to lobby for the listing. The listing has also seen competition by banks from New York to Tokyo for a role in the deal. Aramco is set to appoint lenders including Goldman Sachs, Citigroup, HSBC, JPMorgan Chase and Morgan Stanley to help manage the sale, people familiar with the matter said earlier this month.
Aside from preparing for Aramco’s debut, Tadawul is also planning its own IPO later this year after hiring HSBC’s Saudi unit to advise on the listing in 2016. Work is “progressing as planned,” according to Al Hussan. There were 16 IPOs in Saudi Arabia in 2017 that raised about $722m, exceeding the $274m a year earlier, according to data compiled by Bloomberg. Al Hussan says there should be more listings this year across the main market, the small-cap market, and by Real Estate Investment Trusts.
Saudi Arabia’s stock exchange is also forging ahead with efforts to win emerging market status this year, taking further steps to amend trading rules. The Tadawul bourse will update its independent custody model and introduce measures to allow asset managers to aggregate orders of managed assets, it said in a recent statement. It will also move to an auction method to determine closing prices and implement a market-making programme aligned with global best practices
Already the biggest stock market in the Middle East, the Tadawul has been making reforms to strengthen its position as a gateway to the kingdom and is seeking to double its market capitalisation in the next five years. According to Al Hussan, the Tadawul has been “very close” to index providers as well as international providers. “We have been very aggressive in the means of reaching international investors and educating them about these changes, making sure all changes are understood. I think things are moving on the right track. I see positive feedback from investors and inter-national index providers. ”
Last year, the Tadawul shifted its settlement cycle to T+2 (i.e., two business days after the transaction date), introduced short-selling and started a parallel market with less stringent requirements for listing, among other changes. FTSE Russell will announce in March if it will add the country to its emerging markets category, and a decision is expected from index provider MSCI Inc. in June.
These moves come amid continued efforts to balance oil supply. Saudi Arabia cut February pricing for most of its crude sales to the US for a second month, even as the world’s largest oil exporter ships record-low volumes to American buyers in an effort to help trim a global glut.
While producers often reduce prices to stimulate sales, Saudi Arabia is cutting shipments to the US market to help limit worldwide supply. Saudi exports to the US dipped to a 30-year low in October, according to the Energy Information Administration, as the kingdom leads a drive by the OPEC and allied producers to reduce inventories.
OPEC and its partners agreed in November to extend output limits until the end of 2018, trying to clear an oversupply that pushed crude below $30 a barrel two years ago. Their caps on production helped lift Brent crude above $68 a barrel last week, the highest level since May 2015.
“Crude prices have been rising in the US and Europe, and trimming the official crude pricing is one way the Saudis have of levelling out the cost to their customers and keeping their own income stable,” comments Robin Mills, CEO of Dubai-based consultant Qamar Energy. Aramco’s pricing cuts to US buyers will help offset an increase in the regional benchmark, he adds.
Saudi crude export shipments to China were also at their lowest in the year during December, according to vessel-tracking data compiled by Bloomberg. In Asia, where Mills says Aramco will face competition from a new Russian pipeline supplying China, the company kept pricing for its main Arab Light crude grade unchanged and cut its Medium and Heavy grades.
By keeping the premium for Light crude to Asia unchanged, Aramco ended a string of five consecutive monthly price increases that had signalled growing demand from refiners on the back of their strong profits on sales of oil products.
Middle Eastern producers compete with cargoes from Latin America, North Africa and Russia for buyers in Asia, their largest market. Producers in the Gulf sell mostly under long-term contracts to refiners. Most of the state oil companies price their crude at a premium or discount to a benchmark. For Asia, the benchmark is the average of Oman and Dubai oil grades.
Aramco needs to prove its viability as an independent organisation if it is to attract investment on the scale it wants. And that job arguably got a little harder after it agreed last week to pay Saudi staff more money, matching a royal order that extended handouts to government workers to ease public discontent over rising prices.
Aramco will pay “eligible employees” an extra 1,000 riyals ($267) a month for one year beginning in January. The payments will be for workers inside the kingdom who make 20,000 riyals a month or less, according to two people familiar with the decision. People who belong to the apprenticeship and college degree programme will get an extra 10 percent of their monthly stipend.
Aramco joins some of the kingdom’s largest companies in the decision to temporarily boost wages after King Salman decided to pay Saudi civil servants an extra 1,000 riyals a month to ease the burden of austerity. “There is a financial impact on the company for sure but this won’t be significant because Aramco’s profit margin is one of the highest in the industry due to the low cost base it has,” says Mazen Al Sudairi, head of research at Al Rajhi Capital Co. “The Saudi government relies heavily on Aramco and oil income for the foreseeable future and maintaining the profitability of the company is still a priority.”
However, the decision may not go down well with investors who “will look at efficiency and cost control” to achieve the best possible returns, according to Tariq Qaqish, managing director of the asset-management division at Mena Corp. Financial Services in Dubai. If Aramco wants to attract long-term investors, its management should watch key performance indicators closely, he says.
Seen in this light, the rumour last week that Saudi Arabian Oil Co. is seeking a $2bn loan from Japan’s export-credit agency makes sense. According to three people with knowledge of the matter, the Japan Bank for International Cooperation is weighing the loan facility but a final agreement has yet to be reached, the people said, asking not to be identified because the discussions are private. A deal would make the Japanese export-credit agency the second state institution to extend financing to Aramco.
Japanese lenders are jostling for position to arrange the loan as a way of getting closer to Aramco and potentially win a role in the IPO, two of the people said. Spokesmen at Aramco and the JBIC declined to comment.
The UK government agreed to a $2bn loan guarantee for Aramco in November as it competed with the US to host the IPO. The unusually large export-credit guarantee was designed to finance the purchase of British goods but opened the UK up to the suggestion that it was trying to influence the decision on where the company should be listed. Aramco also signed an agreement with a group of regional and international lenders for $10bn of standby revolving-credit facilities in 2015.
These are heady days where big numbers are at stake. No wonder the major players are jostling for position.